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From Balance Sheets to Linen Sheets, Martha Stewart Is a Bona Fide Business Genius

This is the question posed by one of the more interesting stock offerings to come along in quite a while: a $100 million stake in the dame of domesticity herself, courtesy of an initial-public-offering syndicate led by
Morgan Stanley Dean Witter.

The matter of Stewart's immortality is relevant in this regard because, if she is immortal -- indeed, even if we may assume she's got but another 30 years in her as America's leading celebrant of content-free living -- then everyone reading these words would be well advised to drop everything and rush to his or her stockbroker, buy orders at the ready.

That is because, if the aforementioned registration statement is even halfway correct, Stewart is the greatest moneymaking machine since I don't know what. There's just no way around it, folks, this lady is a moneymaking fool.

The problem presented by the offering -- and the only significant one at that -- is what would happen to the company and its stock if, let us say, Stewart were to be run over by a truck? Or what if this more likely scenario were to occur: Martha accidentally hangs herself while demonstrating 10,000 new and interesting ways to make festive dining-room-table centerpieces out of pine cones and discarded garden hose. Short of that, this offering is the deal of all time and the only IPO I can remember since I don't know when in which the company is almost literally drowning in profits.

As far as I am concerned, this offering changes everything about Stewart. No more jokes about the Queen of White-Bread Living. No more cheap shots about 44 new ways to wash and polish a spatula. (Honest, I'm going to try.) The lady deserves better -- a lot better. She just might be the smartest, most clever woman in American business today.

Martha Stewart

Accepting the 1999 National Magazine Award in photography for her magazine, Martha Stewart Living.

Photo: AP/Richard Drew

Look, it's really very simple. I really don't care about all those stories of how she is some sort of vicious control freak who likes to beat up on the help. I don't care if her lifestyle message is fatuous and demeaning to women. (My own personal opinion is that it isn't at all.)

All I know is that she's filed papers with the
Securities and Exchange Commission to sell a so-far-undisclosed number of shares in a company bearing her name,
Martha Stewart Omnimedia. It is a company she built basically all by herself that shows balance-sheet cash of $17.3 million, total assets of $123.5 million, shareholder equity of $43 million and -- are you ready for this? -- 1998 net income of an amazing $23.8 million, none of which seems to derive from accounting tricks. And what's more, all the numbers are moving in the right direction -- and rapidly. Her revenue is growing dramatically, her margins are widening and her balance sheet is strengthening. In 1998, Stewart hauled off $5 million in salary and various perks. If you want my opinion, she has earned every dime.

Now come on! With swill such as
Amazon.com(AMZN), which has never made a dime of profit and almost certainly never will, currently selling for a preposterous 48 times its revenue, it ought to be a slam-dunk for the fast-talkers at Morgan Stanley to put this deal over. The only question about this stock offering is how the investment bankers will price it.

In fact, if Martha were an actual retailer of what she licenses, and thus reported revenue the way that Amazon.com and other retailers do (everything that gets sold is claimed as revenue even though only a tiny fraction of it ever "passes through" to Amazon's bottom line), Martha would be one of the biggest businesses anywhere.

Did you know that in 1998 she sold (and I hope you're sitting down for this) more than $750 million worth of sheets, towels, washcloths and God knows what else through
Kmart(KM) and her other retailing outlets? And retailing is really, for now at least, just a sideline activity to her main line of business, which is magazine and book publishing. In 1998, those two activities accounted for 70% of her revenue.

The problem with this company, if there is one, is that its fortunes will be inevitably and inextricably linked, in the public's mind, with those of Stewart herself. Martha isn't
Betty Crocker -- that is, an invention of some marketing people, which can be updated and reinvented for as long as there's a woman alive somewhere who is prepared to find fulfillment in baking a devil's food cake.

Sadly, Ms. Stewart is an actual person with an actuarially determinable lifespan on this planet. At 57, she's got maybe 33 more years ahead of her, according to actuarial tables from the
Northwestern Mutual Life Insurance Company.

Right now, she is a pretty good-looking woman, if you want my frank opinion -- and I've studied her close up on a Stairmaster. (She works out at my gym.) But, hey, as
Paul Newman said in the 1963 film,
Hud, nobody gets out of life alive -- which means that the day will assuredly come (long before Stewart turns 90, I might add) when her lifestyle hustle will have been reduced to coming up with new and exciting ways to pretend she isn't wearing Depends. And who's going to want to spiff up the sitting room with a collection of four-color coffee table books on that subject? As for me, I have enough trouble watching that old guy,
Jay Kordich, with the prehensile eyebrows on cable TV explain how you can stay perky forever on nourishing meals of broccoli juice.

My concern for Stewart's company is, frankly, that it can't survive Martha herself. If Martha Stewart were
Gianni Versace, and some wacko were to step from the shadows and off her, the business would almost assuredly collapse. What would it sell -- how Martha Stewart might have color-coded her hanky drawer? What would happen to those CBS radio and TV spots? Who's going to pretend to be Martha Stewart in the process of shearing a sheep to make her own wool, Linda Ellerbee?

The thing about Martha -- the thing that sets her apart from Betty Crocker and
Aunt Jemima and
Sara Lee and all the rest of them -- is that she's real. Because of this, women everywhere now buy her sheets and pillowcases at Kmart because they think Martha has personally signed off on every aspect of them. Whether she actually does or not, doesn't matter. What matters is that they
think she does. They think that if Martha Stewart lives in a color-coordinated world where everything matches and where it's OK to be anal, then they can inhabit that space, too. They think Martha Stewart is the personification of taste, and for all I know, they're right. She's certainly got more taste than Madonna has.

The problem is, to get her message across, Stewart has turned her life into a real-life version of the 1998
Jim Carrey flick
The Truman Show, in which literally everything she does, every day of her life, seems to qualify for treatment as a Schedule C tax deduction. Here's Martha showing you how to get up refreshed in the morning, how to make your own breakfast croissants from scratch, how to -- oh, it just goes on from there. Martha Stewart, the greatest example of performance art since
Hugh Hefner could still get it up.

Right now, Martha's business consists of two magazines (
Martha Stewart Living and
Martha Stewart Weddings), a Martha Stewart TV show, 27 Martha Stewart books, a Martha Stewart radio show, a Martha Stewart newspaper column and a Martha Stewart Web site. Martha makes an absolute bucket of money from all this, boasting a 13% net profit margin that, for a media company, is utterly heroic. Most media companies are so leveraged with debt that they don't have any profits at all. Martha's total debt load is a mere $15 million, amounting to barely 12% of her assets. This is a balance sheet to die for.

There is, I should say, one teeny-weeny thing about this company's financials that seems just a teeny-weeny bit troubling. The company is making all that money -- an incredible $23.8 million in net income for 1998 -- yet, basically, it doesn't seem to be paying any taxes.

How's that possible?

The corporate income tax rate is 35%, and when you throw in state and local taxes, you're up to around 50 percent. But the IPO registration statement says that in 1998 the company paid something around 5% in taxes. Perhaps that's because the company has functioned up until now as a limited liability company, meaning that the owners paid the taxes. In any event, as a normal public corporation, the company will now show much lower net earnings in the future a result of paying taxes on its income instead of passing the burden through to shareholders.

Be that as it may, to be successful over the long term as a public company, Martha is clearly going to have to start scaling back on the intense personalization of her lifestyle message and start capitalizing on the name Martha Stewart instead of the person behind the name.

Martha, it really makes my day to think of you starting yours by standing in front of an open bay window, gazing over those acres and acres of marigolds and snapdragons, with the gentle New England breezes billowing out those floor-length sheer curtains all around you.

I think it's great that you can start the day like that -- or at least that you've got half the women in America thinking you do -- and I'm totally dead serious, too. I'll tell you this: No one on earth wakes up wondering how
Jerry Levin starts his day, right?

I just think that, as a public company, you're going to have to start going the licensing route, big time. You've got to start flogging Martha Stewart wicker furniture, Martha Stewart microwavable hors d'oeuvres and Martha Stewart mucking-about-in-the-garden construction boots like the kind you track mud into the gym with. And how about a Martha Stewart signature edition of the Lincoln Navigator? Hey, if
Ralph Lauren can sell house paint at
Home Depot(HD), I'm sure the
Georgia Pacific Group(GP) would fall all over itself to get you to endorse a line of Martha Stewart vinyl siding.

And you know what, Martha, I have faith in you. I have faith that you know what's got to be done. You're smart, in fact, you're brilliant, and I think that you know as well as I that it's time to stop ratifying your lifestyle and start capitalizing on the brand name. Is that why you're going public in this IPO? I'll bet it is. Good luck, you've earned it.

You can reach me by email at
cbyron1@home.com
.

Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at commentarymail@thestreet.com.

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